The CPEC is gaining momentum in terms of awareness and popularity. However, very little is known about what new economic challenges it might introduce for Pakistan.
There has always been a trade-off between economic progress and over exploitation of resources and environmental issues. This is not happening for the first time though; every developed country of the world has passed through almost the same process.
Even the example of China is pertinent in this context. China has accelerated and maintained its higher economic growth at the cost of heavy carbon emission and other negative externalities. The contribution of China in total carbon emission is about 28 percent, the highest among the entire countries of the world.
However, countries at their transitional stages are less conscious about the negative externalities that come from economic progress. Once they ensure sustainable economic growth, they move to adopt policies and strategies that have least negative externalities. For example, China has now changed its strategy of production. Rather than importing raw materials from neighbouring countries, processing them in China and then exporting to these and other nearby countries, China is in the process of establishing business units in neighbouring countries, using their raw materials and selling these final products to the host counties and other similar markets.
This strategy helps China in multiple ways; first, its helps reduce international pressure on China from environmental agencies and developed countries regarding carbon emission. Second, using local resources and selling it back to the same and other nearby countries reduces transportation and other costs resulting in increased profit margin of Chinese productive units. Third, negative externalities and implicit cost in the host countries as a result of the process of production will not be China’s foremost and immediate concern.
Under the CPEC agreement, China will get easy access particularly to central Asian and Gulf countries. After getting access to some Pakistani export markets – like the UAE and Afghanistan – China will become an international competitor for Pakistan, especially in cotton and the leather manufacturing sector. The demand for Chinese products in the international market is already higher because of the varieties of goods it can offer.
Pakistan’s products are comparatively expensive in the international markets and available in fewer varieties. The entry of Chinese products into the same markets may put further pressure on Pakistani export products – particularly in Afghanistan and the Middle East. About seven percent of the total exports are traded with Afghanistan and approximately the same amount is exported to the Middle East. The entry of China into the same markets via the CPEC route may introduce a big competitor for Pakistani products. The export demand for Pakistani products such as cotton and leather products might reduce as China is also an exporter of these products.
Moreover, due to import tariff exemption under the Free Trade Agreement (FTA) and the CPEC, China has to increase the import of some products from Pakistan such as paper, paper board, rubber, footwear and some chemicals. Pakistani local industries using these inputs are also growing. However, Chinese products have greater demand and their easy availability might put at stake the survival of the local industry. Our local industries might not be able to compete because of lower profitability, lack of competitiveness, higher production cost and underutilisation of resources. Import of these goods from China might discourage investment in local industries.
Historically, the gain from free trade agreements with other countries was not beneficial for Pakistan. From the first phase of the free trade agreement between China and Pakistan in 2006, it was concluded that the gain from trade was lower than the loss from trade. The potential available for Pakistan was not fully utilised and thus a free trade agreement was not properly materialised.
A post-FTA phase-1 reported by the Pakistan Business Council 2013 revealed that under the FTA China gave 100 percent tariff exception not only to Pakistanis products but also for Asean countries which resulted in increased competitors for Pakistani products as well.
We have to look the entire scenario optimistically. It is not wise to avoid a mega development project because of the associated potential challenges. However, it does not mean that taking the CPEC optimistically will reduce its challenges unless we wisely manage the challenges resulting from the corridor. A proper neutral evaluation and re-evaluation of the corridor may help us devise policy on the corridor.
The writer is an assistant professor of economics at the Institute of Management Sciences, Peshawar.
Email: zahoor.khan@imsciences.edu.pk
Sourceaily The News